Brookfield Asset Management, whose eclectic $690bn portfolio includes office towers, gas pipelines and a nuclear services company, is not quite the world’s biggest investment firm — but it may be the most complicated.
Stock market investors looking to buy a piece of the Canadian group must select from more than half a dozen publicly traded vehicles that offer exposure to different parts of a vast investment empire. They must assess not only the value of the assets that Brookfield owns, but also the fees it can expect to earn from running money for outside clients.
It is a valuation exercise that may deter some investors. “As a general rule of thumb, public market investors don’t tend to reward complexity,” said Robert Lee, an analyst at investment bank Keefe, Bruyette & Woods.
Now, in a bid to persuade more investors to consider owning its stock, Brookfield is considering sweeping changes to its corporate structure which its executives believe would make valuation more transparent.
The idea echoes moves by listed private equity groups, which boosted their stock prices by tweaking their corporate structures.
Blackstone announced in 2019 that it was abandoning a partnership structure that imposed onerous tax filing obligations on public shareholders. Since then, its shares have more than tripled. Apollo and KKR have embraced similar reforms, while also abolishing dual share classes that had alienated some investors by handing control rights to insiders.
Whereas Brookfield’s US peers have gained investors by removing elements of their once-cumbersome corporate structures, however, the Toronto-based group is following a different path. Proposals announced earlier this month by Bruce Flatt, chief executive, would take what is already one of the financial industry’s most complex organisation charts, and supplement it with yet another public company.
Flatt’s proposal would split up Brookfield Asset Management, the listed company at the apex of Brookfield’s corporate structure. A breakaway company comprising BAM’s fee-earning asset management business would list on the stock exchange, where Lee believes its lucrative deals to manage $364bn of fee-generating funds belonging to outside clients could fetch a valuation of over $75bn.
“When you have an asset management fee stream, it’s a stream of income and it’s easy to assess whether it’s growing or not and to put a multiple on it,” Flatt told the Financial Times in an interview earlier this month.
The fee-based business includes a fund that would help to finance a proposed $3.6bn takeover of Australian utility AGL Energy disclosed at the weekend. Brookfield is also raising new funds including a $25bn infrastructure fund and a $15bn private equity fund, according to a person familiar with the matter.
BAM itself would become a repository for the assets Brookfield holds on its own books. Among the most notable are London’s Canary Wharf office development, various Manhattan office towers, and more than 100 US shopping malls.
The apex company would also remain the primary shareholder of the newly separated asset management group even after shares traded on the stock market. The company owns portions of other listed vehicles that house infrastructure, renewable energy and industrial private equity investment businesses, stakes that total about $24bn.
A spin-off of the asset management business could give it an independent price in the market, making it easier to pinpoint how much BAM is worth.
“Brookfield used to be an opaque organisation and one that was hard to value,” said George Taras, a portfolio manager at Baron Capital, which owns about $150mn in Brookfield shares. “Now, you will have public market transparency for each of their businesses and a public float.”
A deal would give investors the option of buying into Brookfield’s asset management business without acquiring a slice of the skyscrapers, wind farms and other assets that the company buys on behalf of its clients. Brookfield employees who work in the asset management division would receive shares in the breakaway company, according to two people briefed on the plans.
Separating Brookfield’s asset management business from its $50bn portfolio of directly owned investment assets would continue a metamorphosis that Flatt began in 2002, when he assumed control of a battered Canadian company named Brascan and set about emulating the organisational form of Wall Street investment franchises such as Blackstone and KKR.
He renamed the company Brookfield Asset Management in 2005. At the time it seemed little more than aspirational for an old-line Canadian conglomerate whose holdings had included hydroelectric dams, mining interests, a brewery and a baseball team.
Brookfield managed no significant assets for outside investors until as recently as the mid-2000s. To draw them in, Flatt first moved the company’s vast holdings into investment fund structures, opening the door to outside investors who wanted to invest alongside the firm.
By last year, Brookfield’s asset management business generated $1.9bn in fee-related earnings. In 2019 Flatt’s group absorbed Oaktree Capital, the $166bn distressed debt group founded by billionaires Howard Marks and Bruce Karsh.
Yet even as Flatt built an asset management franchise to rival those of Wall Street, Brookfield’s balance sheet has remained as a vestige of its conglomerate past. Asset-heavy and running the gamut of Brookfield’s diverse investments, it has confounded some investors’ efforts to figure out what Brookfield is worth.
If the proposal to separate the asset management business proceeds, it will represent the most radical of a series of efforts to divide Brookfield’s sprawling balance sheet into smaller parcels.
“You can’t undo your history,” said Charles Kantor, a senior portfolio manager at Neuberger Berman, one of Brookfield’s largest outside shareholders with over $500mn in shares. “Brascan was . . . high complexity, and every step thereafter has been to use that complexity to create more bespoke securities and allow investors to choose what their preferences are.”
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